Rail Stocks Tumble in China, Hong Kong

China’s railway companies tumbled in Shanghai and Hong Kong trading on speculation a deadly bullet train accident in the eastern part of the country will prompt the government to slow construction and reduce investment.

CSR Corp., the largest train maker, slumped 9.4 percent to 6.01 yuan as of 1:22 p.m., set for the biggest decline since August 2008. China CNR Corp., the second-largest, lost 9.4 percent to 5.89 yuan, its worst drop since listing in 2009. China Railway Construction Corp., builder of more than half the nation’s rail links since 1949, sank as much as 5.8 percent in Hong Kong.

The Chinese government will slow railway investment as it pays more attention to safety and travelers switch to other transport, according to Shenyin & Wanguo Securities Co. and Barclays Plc. The high-speed train accident may damp demand for property in cities along the new railway lines, said Credit Suisse Group AG. China plans to spend 2.8 trillion yuan ($434.3 billion) on railways in the five years ending 2015.

“The high-speed rail concept involves a large number of companies and if investment is cut, even the smallest parts makers and steelmakers will get hurt,” said Tu Jun, a strategist at Shanghai Securities Co.

The accident occurred on July 23 near the eastern city of Wenzhou when a train lost power after reportedly being struck by lightning and was rear-ended by a second train, the state-run Xinhua News Agency said, citing the provincial emergency office. The crash killed at least 43 people and injured more than 200, according to Xinhua.

Rating Downgrade

“We expect travelers to gradually turn to alternative transport, including expressways,” Patrick Xu and Jon Windham, analysts at Barclays, wrote in today’s report. The accident is also expected to deter development of high-speed railway lines under construction or in planning across China, they wrote.

Shares of CSR and CNR were cut to “neutral” at Shenyin & Wanguo, ranked China’s most influential research provider by New Fortune magazine last year. The railway ministry will postpone auctions for railway equipment, Huang Kui and Li Xiaoguang, analysts at the Shanghai-based brokerage, wrote in a report.

“In the next three and six months, it’ll become the most important job for the railway system to overhaul haphazard safety and ensure the safe operations of trains,” the report said.

Railway Networks

Three railway officials, including head of the Shanghai Railway Bureau, were sacked after the collision and will be investigated, Xinhua reported yesterday.

China plans to extend its high-speed railway networks to 120,000 kilometers from 91,000 kilometers by 2015 to accelerate urbanization and bolster development in the nation’s underdeveloped regions. Former railway minister Liu Zhijun was fired in February and put under investigation over bribery allegations.

China’s economy, the world’s second-largest, grew 9.5 percent in the second quarter, slowing from 9.7 percent in the previous three months, as the central bank raised interest rates and banks’ reserve-requirement ratio to stem inflation that quickened to the fastest pace in three years in June.

The 221 billion-yuan Beijing-Shanghai bullet train line began on June 30 and has suffered major delays from electrical failures at least three times since.

Airlines Rally

Airline stocks rallied in Shanghai on speculation travelers will shun high-speed rail. Air China Ltd. (601111), the nation’s largest international carrier, gained 0.3 percent to 9.84 yuan. China Southern Airlines Co., the biggest carrier by fleet size, advanced 1.1 percent to 8.07 yuan.

“Airline stocks have already fully priced-in pessimistic expectations,” Zhang Hongbo, an analyst at Citic Securities Co., wrote in a note today. “They are expected to rebound during the July-to-October peak season for air transportation.”

The train accident and “constant malfunctioning” of the Beijing-Shanghai bullet train may damp demand for property along rail lines, Credit Suisse said. Land sales in “several” cities along the new Beijing-Shanghai high-speed railway line surged in 2009 and 2010, analysts including Jinsong Du at Credit Suisse wrote in a report.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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